Morgan Stanley has agreed to pay a fine of $7.5m to the Securities and Exchange Commission (SEC) to settle allegations of customer protection rule violations.
The securities watchdog alleged that from March 2013 to May 2015, the bank’s affiliate- Morgan Stanley Equity Financing- served as a customer of its US broker-dealer, which allowed the affiliate to use margin loans from the US broker-dealer to fund the costs of hedging swap trades with customers.
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The margin loans helped to lower borrowing costs on swap trades as well as lowered the US broker dealer’s daily customer-reserve requirement by up to several hundred million dollars.
However, SEC noted that the bank “provided substantial cooperation” during its probe and agreed to adopt measures to enhance its calculation processes.
The regulator also added that the bank increased the amount of excess funds in its reserve account.
SEC enforcement division complex financial instruments unit chief Michael Osnato said: “The Customer Protection Rule establishes crucial safeguards for investors to ensure that their cash and securities are secure when held by a broker-dealer.
“Complex trading schemes designed to artificially reduce the amount a broker-dealer must maintain in its customer reserve account run contrary to these basic obligations.”
Morgan Stanley neither admitted to nor denied the allegations.
